Small- and mid-cap stocks have enormous potential to deliver going forward, says Ali Dibadj

Key Concepts:

• Fixed Income: Mortgage-backed securities, Asset-backed securities (ABS), Collateralized Loan Obligations (CLOs), Private Credit, Duration Extension, Spread
• ETFs: JABS, JSE, Vanilla, JAAA
• Risk and Return: Higher quality vs. higher yield, Investment Grade, Triple-A ratings
• Equity Market: Geopolitical changes, Innovation, Healthcare, Technology, Small and Mid-Cap Stocks

Fixed Income Opportunities

• Securitized Sector: The securitized sector of the market is currently trading cheaply.
• Duration Extension: As the cycle eases, extending duration is expected. Mortgage-backed securities are ranked as having the longest duration.
• ETFs:
  • JABS: A broader pool of securitized assets, not as long duration as mortgage-backed securities, but offers the opportunity to go more broad and even slightly lower in terms of ratings for a higher return.
  • JSE: A securitized income view.
  • Vanilla: An ETF with global exposure, suitable for clients looking at duration extension and higher quality.
  • JAAA: A flagship ETF with triple-A CLO exposure, offering safety and good spread, especially when rates come down. It has crossed $25 billion in assets.
• CLOs (Collateralized Loan Obligations):
  • CLOs are backed by assets and are considered safer than corporates if appropriately rated.
  • During the 2008 financial crisis, CLOs did not default.
  • Triple-A CLOs are considered quite safe now due to improved ratings.
• Private Credit:
  • Private credit with asset backing is considered even safer.
  • Direct lending (cash flow lending) is less favored compared to asset-backed lending.
  • Victory Park Capital specializes in asset-backed lending.
• Yields:
  • Mid to high single-digit yields are achievable in the securitized area.
  • Triple-B type levels offer around 7% yield.
  • Higher quality investments offer yields in the fives and sixes.
• Spread Importance: As the underlying yield drops, the spread becomes more important.

Equity Market Perspectives

• Opportunities: Despite some companies being overvalued, there are still enormous opportunities in the equity markets.
• Oracle Example: Oracle's stock increased significantly (40% in a week), demonstrating potential opportunities.
• Themes:
  • Geopolitical Changes: Clients are seeking investments that navigate geopolitical tensions.
  • Innovation: Investments in innovative areas that break through geopolitical tensions are favored. Healthcare and technology are highlighted.
  • Demographics and Lifestyle Changes: Healthcare and technology are attractive in this context.
  • Small and Mid-Cap Stocks: The broad base of small and mid-cap stocks are considered undervalued.

Conclusion

The discussion highlights opportunities in both fixed income and equity markets. In fixed income, the securitized sector, particularly CLOs and asset-backed private credit, offers attractive yields and safety. In equities, despite some overvalued companies, innovation, healthcare, technology, and small/mid-cap stocks present potential opportunities. Navigating geopolitical changes and demographic shifts are key considerations for investors.